The offer, worth £500 million today, was made during negotiations in the 1970s the government of then prime minister Harold Wilson held with Libya aimed at halting the supply of weapons to the now-defunct Irish Republican Army, documents seen by The Independent show.
The deal on the IRA was part of a package of compensation measures to appease the Libyan leader and help open up British trade with the north African state in the 1970s, the newspaper said.
It quoted a “personal message” from Wilson to Gaddafi in which it said the prime minister made clear the government was prepared to pay Libya in return for ending material support for the IRA.
“I do not want to anticipate the results of the forthcoming talks, which we shall enter into in a truly constructive spirit, but it might be helpful nevertheless to mention two questions of particular importance to us.”
“The first of these concerns Northern Ireland,” Wilson wrote in 1975.
The letter is among documents released to Britain's National Archives.
The paper said by the end of the 1970s it was clear negotiations had failed, with Gaddafi holding out for a payment of £51 million, or the equivalent of £1.5 billion today.
Britain's Foreign Office said it was unaware of any offer to Gaddafi, who admits having supported the IRA. Much of the material in its arsenal dumps came from Libya.
Libya has said it will resist demands for compensation over attacks by the IRA, who killed more than 1000 people during their armed campaign to rid Northern Ireland of British sovereignty through violence.
Britain's dealings with oil-rich Libya have come under intense scrutiny following the release in August of the only man convicted of the Lockerbie bombing, a move that sparked anger in the United States.
Former Libyan intelligence agent Abdelbaset Ali Mohmet al-Megrahi was freed on compassionate grounds by the Scottish government because he has terminal prostate cancer.
The 1988 bombing of a Pan Am plane over the Scottish town of Lockerbie, Britain's worst-ever terror attack, killed 270 people.
Source: The Australian